Pur Autre Vie

I'm not wrong, I'm just an asshole

Friday, July 01, 2016

Affordability Doesn't Mean What You Think

Imagine you are an economically literate urbanist and you have been asked to testify as an expert on urban policy.  The situation is this:  the county includes a large and growing city as well as a much smaller town that is connected to the city by a road.  The town has some retail and other employment, but a significant number of its residents commute to jobs in the big city.  However, this has grown increasingly unpleasant as the result of congestion on the road that connects the town to the city.  Voters are complaining that the commute is terrible, and the county legislature is determined to take action.  In particular, the proposal is to add an extra lane of traffic on the road, increasing its capacity.

Here is how the testimony might go:

Commissioner LaGrande:  Will adding a lane to the road reduce congestion?
You:  No, it will do nothing of the sort.
[audience gasps]
LaGrande:  Explain yourself!  The problem is that too many people are trying to get from the town to the city every morning, and from the city to the town every evening.  Adding a lane will make the road less crowded and result in less congestion, won't it?
You:  Respectfully, commissioner, we need to consider the concept of "induced demand."  It's true that in the short term, congestion might decrease when an extra lane is added.  But things don't stop there.  Now that the commute is easier, it will be more attractive for workers to live in the town and drive to the city.  As workers move to the town, congestion will increase, and this process will continue until the congestion returns to roughly where it was to begin with.
LaGrande:  So you're telling me there's no long-term benefit and we shouldn't add the lane?
You:  That's not what I'm saying.  What I'm saying is that the benefits don't include a long-term reduction in congestion.  Instead, the potential benefits have to do with increasing the population of the town—with the added lane, more people can live there, and the city's workforce is also increased.  This could help the economy grow, benefiting both landowners in the town (who can convert farmland to higher-value residential developments) and businesses in the city (who have a larger pool of labor to draw on).  Of course, these benefits may or may not outweigh the costs—I can't tell you how to make the trade-off.  But I can tell you that an honest accounting of the benefits doesn't include a long-term reduction in congestion.  For that, you would need to turn it into a toll road or something like that.
This is very standard stuff.  Anyone who supports adding a lane in these circumstances shouldn't sell it as an anti-congestion measure.

Now the city council calls you to testify on a new land-use policy that will facilitate denser development.  By coincidence, LaGrande serves on both the county commission and the city council.

 Councilor LaGrande:  Will allowing more development reduce rents?
You:  Of course it will, it's basic supply and demand.  As supply increases, rents will fall.
[audience nods appreciatively] 
This is very standard stuff.  Anyone can understand that increasing supply reduces prices.  But you might feel a slight twinge of discomfort, a little bit of cognitive dissonance.  After all, earlier you told LaGrande that "induced demand" means that increased road capacity will translate into increased population, but not into reduced commute times.  Now you've implicitly told LaGrande that the concept of induced demand doesn't apply to rent.  A city can achieve a permanent reduction in market rents by allowing more development.  The reduced rent will not draw more people into the city, pushing rents back up to their equilibrium level.  Because...  [crickets chirping].

And this is why I think urbanism is being mis-sold.  It's absolutely true that in the short term an increase in the supply of housing should translate into rents that are lower than they would otherwise be.  But this will draw people into the city, and it's not clear that the long-term result is lower rents.  In fact, if the city is attractive primarily because of the social and economic opportunities that stem from living near so many other people, then the long-term effect of increased development is probably rents that are higher than they otherwise would have been.

That's why this Matt Yglesias tweet is (perhaps unintentionally) very revealing about what "affordability" means to him:

Got that?  Affordability shouldn't be understood in terms of the level of rent.  It should be understood in terms of the number of people who live in the city.  So when Yglesias proclaims that cities can increase their affordability by allowing more development, his readers should understand that "affordability" is a term of art and that he is not saying that rents will be lower than they otherwise would have been.  Low rents have nothing to do with affordability.  Affordability just is density, so allowing an increase in density by definition increases affordability, even if rents go up by a lot.  (This makes it odd that the title of his book arguing for more development is The Rent Is Too Damn High, which is why I feel his tweet's honesty may be unintentional.)

I want to emphasize that density does in fact have a lot of benefits (as does increased transportation capacity).  But just as increased commuting capacity shouldn't be sold to the public on the grounds that it will reduce commute times, increased development shouldn't be sold to the public on the grounds that it will reduce rents in the long term.  The long-run benefits have to do with giving more people access to the city's amenities, which may also increase the value of the city to its existing residents.  (After all, to repeat my earlier point, the big attraction of living in a city is that it puts you into easy contact with a lot of other people.)  But for some reason, advocates of density often choose to frame their arguments in a very misleading way, and I think this helps explain the backlash against dense development.  The urbanist promises are never kept.  This is a big problem for urbanism and it will continue to be a problem until we can be more honest about the effects of our preferred policies, something we learned to do a long time ago when it comes to congestion.

9 Comments:

Anonymous What do I know, but: said...

Good post!

10:06 AM  
Blogger Chris W said...

Gah, apparently my comment is too long. I guess I'll make two. Part 1:

This is a fun gotcha but it doesn't withstand close scrutiny.

The two scenarios of road capacity and housing capacity are not identical, because one has (at least in theory) substitutes that the other doesn't. If you widen a road, you're specifically increasing the capacity (and thus the comparative cost) for car traffic, but that's not the only way to get from Point A to Point B. If you invested that money in transit, or bicycle infrastructure, or if you had the sort of land use that built things closer together such that you need less time on the road to get from A to B, those steps would all increase mobility and accessibility without increasing car throughput. Whereas widening a road will often make bike/ped traffic more inhospitable and take resources that could otherwise have been invested in operating transit, so by going down that path you are not just accommodating more car traffic, but specifically starving what should be its substitutes. It's not precisely that the demand for transportation is magically conjured from nothing, but it is "induced" into taking that one specific form.

While road extensions in the suburbs are what most commonly get the "induced demand" line, it works for better transportation projects, too. Adding bicycle lanes in a city will get more of its residents out of their cars and onto their bikes, because they'll feel safer riding (and this can spur a safety-in-numbers virtuous cycle). This is a good thing, and insofar as bikes take up less space than cars, it can increase the effective capacity of many urban streets. But it works not because it's creating new demand for transportation, but because it's "unlocking" an alternative outlet for demand that already existed.

But there *are no substitutes* for housing. Everyone needs a place to live. So the naive supply-and-demand frame *actually is* more applicable for housing stock than it is for road space. If you refuse to build more housing, I guess you can force people to spend lots on substandard accommodations (e.g. illegally subdividing rooms). Or in extreme cases even drive people away from your city entirely, a dubious goal if your area has a better economy than surrounding regions, of course. But that isn't actually going to destroy the demand for housing, because the amount of housing stock in an area isn't the only input that determines its demand. The amount (and quality) of jobs is a much bigger factor. I mean, they've managed to choke off nearly all new housing in the Bay Area, but that hasn't stopped people from wanting to live there; not with all the high-paying jobs.

And that's the key to long-term affordability: when it comes to housing, you can't iron-clad promise anything because the desirability of any particular area is too dependent on the fortunes of its local industries, which will inevitably (and, to a good first approximation, unpredictably) wax and wane. But if you build enough in the good times, you can at least hold things *steady* in the short term, and then rents may fall once an inevitable downturn hits, or that luxury housing is not so new anymore. (Take a look at, say, Grand Concourse in the Bronx: those buildings were the luxury condos of their day.) The problem is, for places like NYC and SF at least, that even our building "booms" have been laughably inadequate in even the boomiest times, in NYC's case since the restrictive 1961 zoning code. I'm sure you've seen Eric Fisher's deep dive on this subject?

https://experimental-geography.blogspot.com/2016/05/employment-construction-and-cost-of-san.html

10:10 AM  
Blogger Chris W said...

Part 2:

One thing that I've seen that does sort of agree with you is people saying that "induced demand" should properly be called "latent demand": the roads and the houses get filled up because people already wanted to be there, and now there's room for them. I think this is certainly true with regards to development in already built-up areas. This is *not* necessarily true if you're building a new road and new subdivisions out in the countryside: in that sort of greenfield situation, creating a whole new exurban community really does create new demand for living in a place (not new demand for living period, it cannibalizes other areas/serves as an outlet for natural growth). But the situation is very different from a city where all those amenities exist already. Which is I guess another reason why I don't think the comparison quite holds.

10:10 AM  
Blogger Chris W said...

And of course, while developing a critical mass of amenities (retail/schools/job access) can get a greenfield town off the ground, not all development schemes pan out; they can't just will themselves into existence if there's not some other reason for them already. Check out the desert roads of California City, CA:

https://en.wikipedia.org/wiki/California_City,_California

I guess I can get behind the idea that "induced demand", while a helpful approximation in certain situations, is actually kind of a problematic concept.

10:27 AM  
Anonymous Relevant to your interests said...

http://spacing.ca/toronto/2016/05/26/induced-demand-housing/

11:30 AM  
Anonymous Anonymous said...

Chris, I think your points are mostly on the nose. However, there is, in fact, one natural alternative to housing. Instead of living where you want to live you can live further away and then have a sucky commute. So if we build more housing in NY, it will in the short term lower costs. Given the lower costs people who want to live in NY but can’t afford to will move to NY. This will reduce demand in Jersey City (and other places) lowering costs there and bringing more people in.
Its not clear that this should completely offset the initial lowering of prices in NY. Although demand for NY housing should be infinite, there are many deluded people in the world who would chose to live places other than NY even if cost were not an issue. So lowering prices brings in people who were kept out by lower prices, but this may not be enough people to fully offset the price reduction from more supply.

1:19 PM  
Blogger Chris W said...

Yeah, that's true. There are basically two alternatives to infill density: not just SF-style super-high prices, but Atlanta-style suburban sprawl. Sprawl doesn't help much in NYC since we're so large, but it does help keep housing relatively affordable in many other places. The argument against sprawl (an argument which I would make) thus can't lean on Econ 101, but has to be based on social and environmental factors instead. And, perhaps, also tie it in with the transportation argument: if people and jobs are closer together they'll need to travel less to satisfy their wants and needs, making more efficient use of the transportation infrastructure we have (and can afford).

I suppose I should actually qualify my arguments above, as well: induced demand *can* make a difference at the neighborhood, hyper-local, level. If one particular neighborhood starts getting redeveloped and attracting amenities, it will bring people who want those amenities from elsewhere within the region. So it's possible that individual projects can be good for the city as a whole but "bad" for their immediate surroundings, if what's important to you is local affordability and preventing gentrification in certain areas (Of course, not every depressed area wants to avoid development as an anti-gentrification tactic: I'm sure the new construction would be more than welcome in, say, Detroit. And if a region is housing-squeezed enough, preventing development may not prevent people from moving in and bidding up housing anyway). Which gets to the fact that, while housing demand in a region isn't substitutable, housing demand across towns/neighborhoods *within* a region is, at least somewhat.

I guess what I'd say, in the end, is that yes of course the "supply shortage" argument is simplified shorthand. But so is "induced demand." At a certain point we do need to acknowledge the complexities and non-economic imperatives involved. (Certainly, my preferred regime of intensive infill development and tight anti-sprawl measures needs to be justified with environmental arguments, not just econ jargon.) There are good reasons why urbanists use one frame or the other at specific times, though, is all I'm saying.

1:57 PM  
Blogger Chris W said...

Ah! One last thing!

The "backlash against dense development" has many different causes, from a number of different causes, and I think it's kind of misleading to pin it on any one specific factor. Yes, for some people they see high rents and dense development go hand-in-hand, and oppose development on that grounds. Whether the "induced demand" theory is true, or whether the development is a lagging indicator, responding to demand that was already there, is something I'd debate. But, sure, that's one part of the story.

Other parts include people who worry that dense development will lower rents! These people, of course, generally being homeowners who are trying to maximize their property values. So you're being attacked from both sides. And then there of course are folks who want to keep "those people" away (for any value of "those people"); this plays into some anti-gentrification rhetoric but is more commonly wielded by suburban racists. Or you have people who just really care about the aesthetics of a place. A lot of anti-development attitudes predate any purported backlash to dense development, and are fundamentally not rooted in economic theories. So, we should get peoples' motivations straigh. Some folks can be converted with charts and numbers. Some people may need examples of better design. Some people– say, for example, those townsfolk in Show Me A Hero Yonkers, may just need to be opposed.

Sorry to keep spamming you with comments. I think I'm finally done.

6:37 PM  
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